The UK Intellectual Property Office has released its final report on Banking on IP? The role of intellectual property and intangible assets in facilitating business finance. A summary of the findings is also available.
The report provides a comprehensive description of the state-of-play on the role of intangibles in financing in the UK. It covers not only the current status but also the problems and barriers. In that regard, the report offers two overarching conclusions:
• A ‘resource toolkit’ must be put in place, aimed at helping SMEs, lenders and other financiers to make more effective use of the value IP and intangibles represent within businesses.
• The programme must build on existing initiatives.
The report also offers 10 specific recommendations:
1. IP and intangibles must be identified during the financing process. For IP and intangibles to be given any consideration within credit decision-making, tools to identify and describe the actual assets (not merely evidence of expenditure) need to be embedded within the lending process. Businesses must use them, and lenders must understand and take note of them. This step will have the wider benefit of boosting IP awareness amongst the business community as a whole.
2. The value of IP needs to be taken into account. The most important step in harnessing IP value is to realise that this value is not nil, and therefore requires active consideration. Robust approaches to determine the value of intangibles exist in the same way as for tangible property and are now included alongside them within the Royal Institute of Chartered Surveyors’ Red Book, regarded as a banking industry reference point.
3. Due diligence guidelines can help to control costs. Checks will be needed in order to create confidence that the ownership and quality of the IP and intangibles are understood, that they contribute to serviceability and cash flow (particularly in the case of debt finance), and that their maturity is in line with what it would be reasonable to expect, given the development stage of the business. This will require templates, training and/or access to professional advice, at a cost that lending margins can support, within a turnaround time that meets business requirements.
4. More effective charges should be part of the lending package. Once knowledge assets are captured and verified, it becomes possible to create a proper interest over them. Legal templates and the resource toolkit will help lenders to achieve this at modest cost, firstly by providing appropriate wording for the instruments, and secondly by providing guidance on the procedures which must be followed when recording them.
5. IP markets and IP financing could be facilitated through infrastructure improvements. The development most likely to transform IP and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded. This is a domain where services must stand or fall on their commercial merits; however, the available infrastructure needs to support rather than impede their establishment.
In particular, as IP and intangibles become clearly identified and are more freely licensed, bought and sold (together with or separate to the business), the systems available to register and track financial interests will need to be improved. This will require the co-operation of official registries and the establishment of administrative protocols.
6. On-going management of IP and intangibles should also be supported. IP does not stop being important once credit is granted. The asset class is unfamiliar, and lenders will need assistance in understanding it, monitoring it and encouraging businesses to use and protect it so that risk is reduced. There could be a role for the introduction of ‘milestones’ (as used in equity and venture debt) and impairment tests to ensure that businesses are well informed and motivated to adopt appropriate IP management practices.
7. Affordable risk mitigation strategies are to be encouraged. Alongside certain guarantees, access to appropriate insurance policies to guard against unforeseen events could greatly increase banking confidence in adding further weight to IP and intangibles within the lending decision. There is private sector appetite to provide these if lenders are willing to create the demand; more detailed dialogue on the requirements of both parties is urgently required.
8. Asset-based financing techniques should be adapted for IP and intangibles. Recent financial upheavals have triggered something of a return to first principles in lending and a greater emphasis on assets for business finance (reflected, for example, in ‘challenger’ bank activity). This greater emphasis on assets needs to be extended to include IP. Alongside mainstream lending, where EFG is an obvious area of focus, asset-based finance and alternative financing methods should therefore be targeted for IP-backed finance interventions; these are the parts of the finance industry most accustomed to understanding and assessing individual assets and their value.
9. Steps to stimulate private investment need closer study. IP rights